China Inflation Goal Allows for Relaxing Price Controls

March 6 (Bloomberg) -- China set a 2012 target for
inflation that’s higher than economists’ forecasts, leaving room
for fiscal and monetary stimulus and an easing of government
controls on the cost of resources such as energy.

Premier Wen Jiabao yesterday unveiled a goal of about a 4
percent increase in the consumer price index, the same target as
last year. By comparison, analysts at Bank of America Corp.
forecast 3.5 percent and those at Goldman Sachs Group Inc.
predict 3.1 percent. The gauge rose 5.4 percent in 2011.

China is moving to more market-oriented methods of setting
prices to spur energy conservation by letting consumers bear a
bigger portion of costs. Wen yesterday pledged pre-emptive fine-tuning of economic policy, a shift from a year ago, when his
main warning was on inflation, a “tiger” he said would be
tough to recapture if allowed free.

The government “wants to push forward energy price reform
and wants the room for that to happen,” said Li Wei, a
Shanghai-based economist for Standard Chartered Plc, the U.K.
bank that earns most of its profit in Asia. Li forecast 2
percent inflation this year.

The 4 percent inflation goal is “conservative,” and the
full-year rate may be about 3 percent, Li Daokui, an academic
adviser to China’s central bank, told reporters today.

Growth Target

Stocks and copper declined yesterday after China cut the
economic-growth target to 7.5 percent from an 8 percent goal in
place since 2005, a signal that leaders aim to cut reliance on
exports and capital spending in favor of consumption.

The MSCI Asia Pacific Index fell 0.9 percent as of 11:52
a.m. in Tokyo today after sliding 1 percent yesterday on the
prospect of China putting a smaller emphasis on growth. The yuan
weakened less than 0.1 percent against the dollar to 6.3093.

China may “appropriately” widen the yuan’s trading band
to better reflect market supply and demand, the official Xinhua
News Agency reported yesterday, citing People’s Bank of China
Governor Zhou Xiaochuan. That signals policy makers may reduce
dollar purchases that limit gains in the exchange rate, said
Jeremy Brewin, who oversees about $4 billion of emerging market
debt at Aviva Investors in London.

China’s new target suggests a switch from a previous view
that the nation needed a minimum of 8 percent growth. As
recently as 2010, Wen said that an 8 percent expansion was
necessary for “basic stability of employment,” and anything
lower will create “problems,” according to an article in the
Communist Party’s Qiushi magazine.

Fewer Entrants

Barclays Capital says the government can afford slower
growth because fewer people are entering the workforce than
before, perhaps 4 million to 5 million a year, rather than as
many as 10 million, according to Chang Jian, a Hong Kong-based
economist for the bank.

The Chinese government is targeting average economic growth
of 7 percent a year during the so-called 12th five-year plan
period, which covers 2011 through 2015. Such goals have been
routinely exceeded and growth reached 14 percent as recently as
2007, when the target was 8 percent, according to the statistics
bureau.

The “relatively high” 4 percent target for inflation
“means the government leaves itself enough room for pro-growth
policies and also room for raising utility prices,” Lu Ting, a
Hong Kong-based economist at Bank of America Corp., said in a
report yesterday. There’s “plenty” of room to boost fiscal
spending without breaching the budget-deficit target of 800
billion yuan ($127 billion), he said.

Power Company Losses

China’s price controls lead to distortions, especially in
energy markets. While power­generating companies have to buy
coal at market rates, they must sell their output at regulated
prices that don’t always cover costs. Forty percent of power
generating companies that use coal lost money in 2010, according
to the China Electricity Council.

Refiners have posted losses from making gasoline and diesel
as controls on fuel prices prevent them from passing on higher
crude costs.

PetroChina Co., the country’s second-biggest refiner, said
yesterday that losses from processing crude last year were
larger than expected by the company.

“Losses are widening,” Chairman Jiang Jiemin said in
Beijing. “We can’t see a turnaround in the situation. It’s
larger” than the 50 billion yuan predicted, he said.

New System

To help narrow such losses, China is planning a new system
to let retail fuel prices track global crude costs more closely.

The World Bank and a Chinese government researcher issued a
report last week urging the nation to enact “breakthroughs in
core reforms” to loosen state control of the economy, including
“pricing reforms for natural resources” such as energy and raw
materials.

Besides letting the government ease price controls,
moderating inflation allows for measures to boost growth. Wen,
69, reiterated yesterday that the government will maintain a
“proactive” fiscal policy and a “prudent” monetary policy
while making “timely and appropriate anticipatory adjustments
and fine-tuning.”

The government in February lowered banks’ reserve
requirements for the second time in three months to boost
lending and sustain growth, following five interest-rate
increases from October 2010 to July 2011 aimed at slowing price
increases that reached 6.5 percent in July, the highest in three
years.

Holding Off

China has held off on rate reductions even as central banks
in Asian nations such as Indonesia and the Philippines have made
cuts. The U.S. Federal Reserve in January pledged to maintain
low interest rates through at least late 2014, while the Bank of
England increased its asset-purchase target in February by 50
billion pounds ($79 billion).

“In projecting a CPI increase of around 4 percent, we have
taken into account imported inflation, rising costs of factors
of production and people’s ability to absorb the impact of price
increases, while leaving room for the effect of price reforms,”
Wen said yesterday.

Consumer prices prices probably rose 3.4 percent in
February from a year ago, based on the median estimate of 26
analysts surveyed by Bloomberg News before data due March 9.
Inflation unexpectedly accelerated to 4.5 percent in January on
the boost to spending from the weeklong Lunar New Year holiday.